Your Minimum Acceptable Rental Yield?

Hi all,

I'm about to purchase my first IP and I would like to focus on capital growth. This means I'll most likely buy ~600-700sqm block of land, 10-12km from CBD. I have come across some really interesting properties; for example one of them is in Oxley, 500m from the train station, 10.5 km from CBD, and it's flood free.

The main issue I find with some of these properties is rental yield, normally 3.7-3.8%. What is the minimum rental yield you would accept if you want to focus on capital growth? I understand this might be a general question and some more details may be required to answer the question. In light of that, I will be able to make another purchase with the leftover cash and I will have a cash buffer.

Cheers and thanks a lot!

 

It depends what yield I would need to continue with my strategy, whatever that is.

For me, I needed a very high yield to keep purchasing. So it really depends.

 

Thanks mate. That makes sense.

When you say "to continue with my strategy", how many purchases are you thinking ahead?

I can comfortably make another one, in which case I would choose a much better rental yield for a balanced approach. However 3.8% for the first one seems very low.

 

It was easy for me - only had to plan one more property ahead - because of my low salaried income, if I ever wanted to buy another property, the purchase had to be high yielding. Serviceability was and has always been my bottleneck.

If you have a serviceability 'buffer' so to speak, you still need to be aware that you might just find the next opportunity to be awesome but low-yielding....

 

Should you do the higher yield buy first?

I'm not familiar with the area but 3.8 seems a bit low. Sydney type low, how much cg is there left? ? Is that am issue? ?

 

Thanks mate. I guess I can then afford this low yield as long as I balance it well with the next purchase to keep my portfolio growing.

The only thing that comes to my mind is that every time we choose a negatively geared property, we are bleeding cash and hoping for equity growth to happen. I guess with a long term (10+ years) buy and hold strategy this shouldn't be a problem.

 

I thought Sidney is way lower, 2-3% yield?

Well my understanding is that it's always good to focus on CG for your first purchase, as you want the equity growth that will assist with your next purchases. As someone said, rental yield will not make you rich, but the capital growth will.

Of course, the art is to buy well. That's why I'm looking into buying a big block of land, close to CBD, next to a train station and something well presented that will be easy to rent. I'm also looking into suburbs that are surrounded by more expensive ones, that will over time experience the ripple effect.

 

3.8% gross yield is very low whatever your religion

 

Oxley is close to where I have an IP @ Jamboree heights.

4.6% gross yield 14km CBD - slightly more family oriented / owner occupier area.

I would be hunting for a higher yield in middle ring & surrounds. Although you could do a Granny flat and bump up yield nicely so potentially budget for that if you could

I am buying Vic now and will not get above 3.8% pretty much impossible to find higher yield for a land banking strategy - I will be renovating on settlement to try and improve.

 

You're not confusing bmv and cg are you?
Higher yield for number1 may help your servicing to buy the 2nd. Brokers can confirm which way to go for your strategy

 

That's not completely true. If you have cash you can put that in an offset against the loan to send it cashflow positive. This won't help your serviceability but it will help your cashflow temporarily.

 

Agreed! That's my plan. But like you said, it'll help my cash for only temporarily until I make the next purchase.

 

I am purchasing a rather large property and the yield according the PM is 3.6-3.8% and this is 11km from Brisbane CBD.

However the block of land is 700m from the train station (according to google) but the land size is over 1,500m2 which is more land banking.

I am actually using 3.4% as my yield for the property but will be interesting to see what it actually gets when we settle next year.

 

My first IP was 5.4% and the second is 6%. Both are in Moreton Bay Area. One is 150m from the water and the other is close to the proposed Uni. My theory is I'll get acceptable capital growth for these specific properties whilst maintaining ok-ish yields.

Entry cost into the market is lower than investing closed in and the properties have less impact on my serviceability for future investment.

 

Seems low to me
Is the 3.7pc after expenses (rates etc) ?
I agree with you it better to buy land as land has the growth ...but i hate losing money

 

3% net before mortgage costs (and one off expenses eg new stove/repairs etc).

(All our IP's are Sydney apartments and getting harder and harder to find more that meet the 3% minimum.....but I'm happy to walk away from prices that in the long run cost us money once rates go back up)

 

Thanks guys.

What interest rates do you use for your cash flow calculations? I suppose it's unrealistic to use 4%, as we all know they might significantly increase.

 

Depends if you are looking at locking it in but I use 6-7% as my bad case scenario.

However if interest rates are at 10% I would likely be using 13-15%.

But as what it cost today I would be using 4-4.5%.

 

I'd go 4 - 4.5% for today. then play with the numbers up to 7%to see how they look

 

In Brisbane rules surrounding granny flats are very different.
In the BCC area you can't rent them separately to the main house.
If you do, expect an appearance in court.
Marg